Government Expects 1 Million Kilos of Demand
Health Canada released the results of a commissioned study on Wednesday showing that demand for cannabis in the first year of legalization could be 926,000 kg, almost 40% higher than the government’s 2016 estimate of 655,000 kg.
The increased demand estimates mean the supply shortage on day 1 will be even worse than expected, with licensed producers only able to produce 350,000 kg a year by October 1, according to CIBC.
Even though a 40% increase in demand may raise some eyebrows, we could easily see consumption over 2 million kg a year, 100% higher than the new government estimates.
In this scenario the supply shortage could persist well past the early days of legalization, benefiting a number of cannabis producers.
2 Million Kilos of Demand is Not a Stretch
The government’s revised demand numbers may look substantial but if Canada turns out to look anything like legal markets in the US, demand could easily rise to over 2 million kg by 2020.
According to the Marijuana Policy Group, legal cannabis consumers in Colorado purchased 302,000 kg in 2017, or 0.84 grams a day per person.
This is up substantially from only 0.43 grams per day per person in 2015 showing that per capita cannabis demand is not stagnant and both the number of users and consumption per user continue to grow.
If we apply Colorado’s consumption patterns to Canada, demand could easily hit 2 million kg in two to three years.
Number of Cannabis Users in Colorado Over Time
Don’t Forget Tourists
The new demand estimate from the Health Canada report only includes demand from Canadians, and ignores demand from cannabis tourists.
Using Colorado, the legal market with the longest history, we can see tourists outpace domestic consumers by 6:1, but consume less due to less time spent in the country.
Colorado Resident and Visitor Population and Demand
On an annual basis, tourist consumption could add 9% to total demand in Canada, or 180,000 kg, not an insignificant boost.
Colorado Demand Split by Visitor or Resident
Planned Capacity does not Equal Actual Capacity
Licensed producers (LPs) have ambitious plans to expand greenhouse capacity to more than 2.1 million kg over the next 3 years.
However not all of this capacity is funded, and for numerous reasons actual capacity will be delayed or come in lower than planned.
Even the largest, most well-funded LPs are experiencing project delays, and some are replacing growing square footage with processing and packaging equipment to prepare for legal sales, lowering maximum growing capacity.
Legal cannabis is a young industry that lacks the project management experience to build and operate expansive greenhouse projects on time and budget in our opinion.
We would not be surprised if the 2.1 million kg of planned capacity ends up being only 1.5 million kg once 2021 arrives.
Legal Prices Higher for Longer
A combination of higher demand, and lower supply growth mean one thing, higher prices.
The cannabis supply shortage on day 1 of legalization could extend well into 2020, bringing with it higher retail prices and better producer profitability than stock prices expect.